Manning & Napier Inc

The second company from my first screener, Manning & Napier is an investment management company founded in 1970 and based in Fairport, New York, USA with a market capitalisation of USD $61.7 million, an 8% dividend yield, a PCF ratio of 0.76 (selling for less than 1x cashflow) and no debt, according to the FT company profile.

It offers separately managed accounts, mutual funds and investment trust funds to high net worth individuals and institutions such as 401k plans, pension plans, Taft-Hartley plans, endowments and foundations. Their services are offered through direct sales and third party intermediaries, platforms and institutional investment consultants.

2016 Annual Report

Pros

  1. Strong absolute and relative returns in the first ten months of 2016, poor performance in the fourth quarter, and recovered ground in the first quarter of 2017 (page 3);
  2. 14,982,880 Class A common shares and 1,000 Class B common shares outstanding. I don’t quite know if this is good yet, but at least I am able to buy common shares in the open market, unlike CGIC (page 6);
  3. 8 mutual funds rated with four or five stars by Morningstar (this speaks to their quality, but several studies show that funds highly rated by Morningstar tend to underperform after receiving those ratings) (page 9);
  4. Entered into a tax receivable agreement with the other stockholders of Manning & Napier Group where they receive 85% of the tax savings Manning & Napier Inc (MN) may realise in case of future purchases or exchanges of Manning & Napier Group shares for MN Class A shares (page 26);
  5. Dividends of $0.16 per share per quarter in 2016 and 2015, for a total of $0.64 per year. This is a dividend rate of 15.8% over the current Class A share price of $4.05. Why then does the FT say that the dividend rate is 8%? Because, from the second quarter of 2017, the dividend was cut in half to $0.08 per quarter (Con 13) (page 30);
  6. $138.3 million in consolidated cash and investment securities at yearend 2016. MN’s share is 17.4% * $138.3 million = $24.1 million, 39% of its market capitalisation (page 33);
  7. Average separately managed account fee was 0.63%, and for mutual funds and investment trusts it was 0.77%, lower than the customary 1% to 1.5% other investment management companies and mutual funds charge (page 47 and 48);
  8. Acquired 75% of Rainier Investment Management, LLC on April 30, 2016 for an upfront cash payment of $13 million on the closing date, and additional cash payments of up to $32.5 million over a four year period, contingent upon Rainier’s achievement of certain annual financial targets. However, the recognised liability for this contingent consideration was only $3.5 million (page 76);
  9. The Class B shares will be cancelled and revert to authorised but unissued Class B shares when the first of these occurs: William Manning dies; his ownership of Manning & Napier Group becomes less than 25%; November 17, 2017 (page 87);
  10. In 2015 MN received a benefit of $3.2 million from the release of uncertain tax positions, making for a lower income tax provision (page 90) (see Con 21).

Cons

  1. 96 pages in the annual report for a company with a market cap of $61.7 million;
  2. Mention of strong absolute and relative returns in the first ten months of 2016 and deterioration of returns in the fourth quarter, but no specific numbers given in the letter to shareholders (page 3);
  3.  Mention of competitive track records for their income-oriented, defensive strategies but, again, no mention of specific numbers (page 3);
  4. The letter to shareholders reads more like a marketing script than an honest and open discussion with the shareholders about the company’s performance and long term objectives (for people who are used to reading the Berkshire Hathaway Shareholder Letters, this one is extremely poor) (opinion);
  5. Decreasing assets under management (AUM). Since a high of $50.8 billion AUM in 2013, it has steadily decreased to $31.7 billion at the end of 2016, a 38% drop (page 10);
  6. For the last one, three, five and ten year periods, almost all of their key strategies have lower returns than their respective benchmarks. Their clients would have done better if they had invested in index funds. I don’t think this company is worth the fees they charge (page 11);MN
  7. William Manning, the cofounder, chairman and CEO, owns 100% of Class B common stock, which has 50.2% of voting rights and no economic rights over Manning & Napier Inc. Public investors own 100% of Class A common stock, which has 49.8% of voting rights and 100% of economic rights over MN. MN, in turn, is the sole managing member of Manning & Napier Group, the holding company for the investment management businesses, but only owns 17.4% of it, while 82.6% is owned by current and former employee-owners through other holding companies. Because MN is the sole managing member, the company consolidates all financial statements, even though it only owns 17.4% of Manning & Napier Group. This means that the company is completely controlled by William Manning, and this makes me very uncomfortable. If it was Warren Buffett, I would be more than ok with this, but I don’t know his character, honesty or competence, and nothing I’ve read so far in the annual report impressed me positively. The employee-owners also receive most of the profit, while the public investors can only receive a small share of 17.4% (page 14 and 15);
  8. Cancellation notice from a retirement plan client that accounted for 7% of MN’s AUM as of 31 December 2016 (page 18);
  9. Manning & Napier Group is the sole source of revenue and William Manning indirectly owns 75% of it, and his interests may not be the same as other stockholders (page 24);
  10. Because MN is considered a ‘controlled company’ by the New York Stock Exchange (NYSE), they are allowed to opt out of certain corporate governance requirements concerning the composition of its boards with a majority of independent directors. Public stockholders may not have the same protections afforded to stockholders of other companies that must meet all the corporate governance requirements of the NYSE. William Manning controls the board and may elect or remove directors at will (page 25);
  11. Owners of Manning & Napier Group have the right to exchange their shares for cash or an aggregate of 65,784,571 MN Class A common shares, per terms of an exchange agreement entered into at the time of MN’s IPO. Right now there are only 14,982,880 Class A shares outstanding. If this were to happen, more MN Class A shares would be issued and MN might come under heavy selling pressure, causing the share price to plummet (page 28);
  12. There are several anti-takeover provisions (including the possibility of issuing preferred shares at will and without shareholder approval that may include rights superior to those of the Class A shareholders) in MN’s certificate of incorporation and bylaws. This may benefit the controlling shareholder, but nobody else (page 29);
  13. Dividend cut in half to $0.08 per quarter starting Q2 2017 (Pro 5);
  14. From December 31, 2011 to December 31, 2016, MN Class A shares cumulative total return was about -40%, compared to +78% for the S&P 500 (page 31);
  15. We finally get to some concrete financial data, in the form of the income statement, after 31 pages! Net income of $82.4 million, down from $117 million in 2015 and $123.7 million in 2014. The bulk of this was attributable to Manning & Napier Group’s noncontrolling interests (page 32);
  16. Net income attributable to MN was $9.3 million, $13.2 million and $9.3 million for the last three years; respectively 11.3%, 11.3% and 7.52% of total consolidated net income, and not 17.4% due to provisions for income taxes. Currently, MN is selling for a PE ratio of 6.6 ($61.7m/$9.3m) (page 32);
  17. 2016 net income per share was $0.63, less than the $0.64 MN paid in dividends. In fact, the company paid more in dividends than what it earned in four of the last five years. This is very poor money management (page 32);
  18. The company anticipates a continued decline in AUM in 2017, meaning lower  revenues and net income as well (page 34);
  19. Net cash provided by operating activities was $89.7 million, down from $127.7 million in 2015 and $174 million in 2014. This shows that the PCF ratio of 0.76 shown in the FT website is also incorrect, since it is attributing this amount fully to MN, and not Manning & Napier Group. The operating cashflow attributable to MN is 17.4% * $89.7 million = $15.6 million, which translates to a PCF ratio of almost 4. Then again, MN public shareholders are not getting 17.4% of the net profits, only 11.3%. 11.3% * $89.7 million = $10.1 million for a PCF ratio of 6.1 (page 54);
  20. All information about directors, executive officers, corporate governance, executive compensation, security ownership, related transactions, director independence, etc, was referred to the proxy statement for the 2017 annual stockholders meeting. Shouldn’t an annual report have this? (page 58);
  21. MN’s provision for income taxes were 44.9%, 23.4% and 56.2% of income before income taxes in 2016, 2015 and 2014, respectively (page 78);
  22. As holder of the Class B shares, William Manning does not have any right to receive dividends or distributions if the company is dissolved, liquidated or sold (so he has no interest in doing any of these things). If he transfers any of these shares to anyone else, those will be automatically converted to Class A shares (page 87).

Conclusion

Yet another disappointment.

The main redeeming qualities this company has is that it’s still profitable, pays some dividends to its public shareholders, and has no debt.

Other than this, what I’ve read gives me a feeling of a company that: does not offer added value to its clients and is going downhill fast in terms of AUM, revenues and net income because of that; is controlled by one man intent on preserving that control and not in benefitting other shareholders; is not very open and forthcoming about its financial performance, directors or executive compensation; regularly paid more in dividends than what it earned in profits, managing its money very poorly, and just cut its dividend in half to compensate for this; has destroyed its value and shareholder wealth in recent years, and will probably continue to do so in the future.

With 22 cons and only 10 pros, this company goes straight to the ‘No’ tray (or the trash can, which would be more appropriate).

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